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SPRING 2003

INVESTING FOR GROWTH/Online Extra

Q&A with Thomas McManus
The Banc of America stock strategist says: "The consensus is underestimating the potential" for a recovery in 2003


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Thomas McManus, the chief equity strategist at Banc of America Securities, is known for his astute market calls. He turned sour, for instance, on tech stocks in October, 1999, several months before the Nasdaq bubble burst in March, 2000. BusinessWeek Personal Finance Editor Susan Scherreik recently spoke to McManus at his Manhattan office about his outlook for the stock market. Following are edited excerpts of their conversation:


Q: Over the past few months, you've increasingly become bullish. Why?
A: First, we think the consensus is underestimating the potential for the economy to recover in 2003. Second, stocks are cheap. Third, investor sentiment is overly gloomy.

Q: What's the biggest risk in your forecast?
A: If you buy stocks now, you might see your investments go down a little bit before they go up.

Q: Why do you think stocks are cheap?
A: The price-earnings ratios of cyclical stocks are inflated, which makes the market as a whole appear more expensive than it really is. Take Caterpillar (CAT ). Three years ago, the industrial-equipment maker was a $90 stock trading on a $5 earnings estimate for the year 2000, so its p-e ratio was 18. Today, Catepillar is a $49 stock trading on a $2.25 estimate for 2003 earnings. The stock price has come down, but the p-e ratio is a higher 22.

Q: Which means?
A: Price-earnings ratios are too high because investors are focused on estimates for meager corporate profits in 2003. But we're taking into account that profits will pick up as the economic recovery gets under way later this year.

Q: What's the potential return on stocks?
A: Over the next two to five years, the average stock should return around 7% to 8% annually.

Q: What are some of your favorites?
A: One we like is 3M (MMM ). It's an industrial company that's undergoing a broad makeover because of new CEO W. James McNerney, who used to be a top lieutenant to Jack Welch at General Electric (GE ). He's focused on making 3M a company whose products are leaders in their fields, much like Welch did when he successfully remade GE.

Q: What else?
A: We think Disney (DIS ) and Carnival Cruise Lines (CCL ) will be beneficiaries of economic recovery. As individuals start feeling better about traveling, these companies will profit.

MARCH 24, 2003




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